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The Raghuram Rajan-effect: The short-medium-and long-term plans. The short-term steps announced by the RBI (lower swap cost on FCNR and foreign currency borrowings), in the wake of new Governor Raghuram Rajan taking over top job at central bank, aim to address currency issues with negligible benefit to banks. The secondary effect of the recent move by the RBI on the bond market, if any, would be the key event to watch for. However, the medium-term (branch/bank licensing) and long-term plans (structural reforms) could have a positive impact, whenever they are implemented.

Short-term measures have negligible impact from an earnings perspective: The RBI has allowed two measures to boost dollar flows—(i) FCNR (foreign currency non-resident account) deposits can be swapped with the RBI at 3.5%, which would enable banks to raise dollar deposits at attractive rates (Libor + 400 bps + 3.5%) for lending in the domestic currency; (ii) banks can raise foreign currency borrowings up to 100% of tier-1 against 50% currently and swap with the RBI at a rate of 100 bps less than the ongoing swap rate. These two measures would have limited impact on banks’ earnings as (i) the landed cost of these deposits would be almost similar to term deposits and (ii) the ability to raise borrowings, at least, has been impacted in the current environment.

FCNR deposits have languished at $15 bn in recent years and CDS (credit default swap) spreads of large banks increased by about 200 bps in recent months, making it challenging to raise these funds. We note that large PSU banks like State Bank of India (SBI), Bank of Baroda, Bank of India and ICICI Bank would be direct beneficiaries as they have a large international presence.

Medium-term measures positive especially on branch licences: The two key medium-term measures—(i) RBI indicated that new bank licences would be announced by January 2014 and that it would constitute a panel headed by former RBI governor Bimal Jalan to assist in the screening process; (ii) “well-run banks” would have the flexibility to open branches of their choice, a key positive in our view, as India remains an urban-centric market. Delays in the approval process and time-bound implementation, frequent issues raised by banks, have been addressed. However, banks would still need to fulfill certain inclusion criteria in under-served areas as a proportion of their expansion in